Lesson 2: The Chart of Accounts Module C: Accounting Responsibility: Unit 1: Introduction to Accounting All virtual enterprise employees Accounting Department Standard: Timeline: Virtual enterprise students will secure Week 8 for a 10-hour program appropriate funding to establish/operate a Week 16 for a 5-hour program virtual enterprise and create, maintain, and utilize a business accounting system. Lesson Lesson 1 Define “chart of accounts” Objective(s): Lesson 2 Name and define the five categories of accounts Lesson 3 Classify accounts by their category Instruction and Procedures What you need to know: The accounting department is responsible for setting up the accounting system for the company. One of the first tasks will be to identify the accounts that will keep track of money coming into the company and money going out of the company. The identified accounts are listed in a “chart of accounts.” Thus, a Chart of Accounts is a listing of all the accounts used by the company in order to keep track of its finances by category. The five categories of accounts are assets, liabilities, stockholder’s equity, revenue, and expenses. All accounts can be classified into at least one of these categories. The asset, liability and stockholder’s equity accounts will appear in the Balance Sheet and the revenue and expense accounts appear in the Income Statement. (The Balance Sheet and Income Statement are discussed in Unit 4.) The categories are defined as follows: 1. Assets—physical items owned by the company 2. Liabilities—money owed to creditors (i.e., suppliers of inventory, companies from which assets were purchased on account, lending institutions from which loans were received.) 3. Stockholder’s Equity—the owners’ claims on the assets of the company 4. Revenue—money coming into the company as the result of sales 5. Cost of Goods Sold—cost of purchasing products to sell and the cost of delivering those products to the customer 6. Expenses—money going out of the company to pay for operations, purchase inventory, purchase equipment and/or furniture, pay employees, etc. Below is a sample chart of accounts for a merchandising company including definitions of each account. Each account is listed in the category to which it is classified and the financial statement in which it will appear. Suggested Chart of Accounts Balance Sheet Accounts Assets Function Cash …money in the company checking account. Accounts Receivable …money owed to the company by customers that did not pay for their products at the time of purchase. Merchandise Inventory …dollar amount of products on hand. Equipment …items owned by the company used to operate the company. Furniture and Fixtures …items owned by the company used by the company employees to do their job or to store inventory. Liabilities Function Accounts Payable …money owed to creditors for items bought but not paid for at the time of purchase Employee Federal …the total amount of federal income tax deducted from Income Tax employees’ gross pay for the month to be paid to the Payable/Expense federal government. Employee State …the total amount of state income tax deducted from Income Tax employees’ gross pay for the month to be paid to the Payable/Expense state government. Health Insurance …the sum of the health insurance deduction from each Payable/Expense employees’ salary each month. Medicare Tax …the amount of Medicare tax deducted from each Payable/Expense employee’s gross pay at the rate of 1.45%. Note (Loan) …money owed to a lending institution or creditor for Payable/Expense funding or property. Sales Tax …the amount of sales tax collected from customers Payable/Expense during the month paid to the state government. Shipping …the amount of shipping expense charged to Payable/Expense customers for the month. Social Security Tax …the amount of Social Security Tax deducted from Payable/Expense each employee’s gross pay at the rate of 6.2%. Stockholders’ Equity Function Capital Stock …money paid to the company for shares of stock purchased by stockholders. Retained Earnings …net income after taxes from the previous year retained by the company and not distributed to stockholders. Income Statement Accounts Revenue Function Sales …money due to the company as a result of a purchase of a product or service. Other Income …use if any other income is received by the company. Cost of Merchandise Function Purchases …cost of buying merchandise inventory (products to sell) for resale to customers. Expenses Function Advertising Expense …the dollar amount of advertising expenses (i.e. paper, color ink cartridges, poster board) Bad Debts Expense …the dollar amount of accounts receivable that is estimated to be uncollectible at the end of the period. Business Insurance …the cost of liability, merchandise, and natural disaster Expense (Liability) insurance paid to be paid monthly. Corporate Federal …the amount of income tax paid to the federal Income Tax Expense government monthly at the rate of 15% of net income for the month. Electricity Expense …the cost of electricity and/or gas for the month. Interest Expense …the amount of interest owed per month for monies borrowed to start or operate the company. The amount changes each month and may be obtained from the loan payment schedule obtained from SCVEN. Internet Service …the cost of Internet service for the month. Expense Miscellaneous …the amount of other expenses for which there is no Expense account, i.e., postage, etc. Payroll Expenses …the employer pays 1.45% of the employees’ gross pay for the company’s share of Medicare tax, and also pays 6.2% of the employees’ gross pay for the company’s share of the Social Security Tax. Rent Expense …the cost to rent the facility in which the business resides on a monthly basis. Salary Expense …the sum of the monthly gross pay of all employees. Telephone Expense …the monthly cost of telephone service. Water Expense …the monthly cost for water. Workman’s …the amount paid to the SC Dept of Revenue to Compensation provide a partial salary to employees who are unable to Insurance work. Go to SC Workman’s Compensation Insurance and click Fee Schedule to determine your firm’s payments. What you need to do and how to do it: Step 1: Identify the accounts your company will need to keep track of its money— money coming into the business, money going out of the business. (Recognize that some companies may have other accounts due to the nature of their business.) Step 2: The members of the accounting department will use the Chart of Accounts form to create the chart of accounts for the business. The chart is in a Microsoft Word table—add or delete rows as necessary. Step 3: When completed, reformat the table for normal to remove the lines. Make available to employees that need the information (accounting department employees, CEO, etc.) Assessments: All employees -- Chart of Accounts Activity. Materials Needed: Chart of Accounts Form Chart of Accounts Activity Resources: Guerrieri, Donald J.; Haber, F. Barry; Hoyt, William B.; and Turner, Robert E. (2004) Accounting: Real-World Applications & Connections. New York: Glencoe. Ross, Kenton E.; Gilbertson, Claudia; Lehman, Mark W.; and Hanson, Robert D. (2003) Century 21accounting. Cincinnati: Thomson South-Western.